THE COMMISSIONER OF INCOME TAX vs. SHRI.K.V.MOHAMMED ZAKIR

ITA/1797/2009HC KeralaKLHC01026558200910 April 2017Author: HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON,HONOURABLE MR. JUSTICE A.HARIPRASAD19 pages
AI SummaryAllowed

What were the facts?

The assessee, Shri K.V. Mohammed Zakir, a proprietor of KAP India Constructions, transferred his business to a limited company, KAP India Projects and Constructions (P) Limited, on September 30, 2000. The Commissioner of Income Tax (CIT) initiated proceedings under Section 263, alleging that the assessment order dated October 30, 2003, was erroneous and prejudicial to the revenue. The CIT noted that goodwill valued at Rs. 2,45,00,000, part of the assets transferred, remained untaxed. The assessee claimed exemption under Section 47(xiv) of the Income Tax Act, stating that all conditions were met. The CIT disagreed, holding that the assessee received consideration other than shares, specifically an unsecured loan of Rs. 2,73,07,905, and set aside the assessment order. The Income Tax Appellate Tribunal (ITAT) allowed the assessee's appeal, finding the CIT's invocation of Section 263 wrong and holding that the deficit was a genuine liability to the proprietor, not taxable consideration.

What did the High Court hold?

The High Court held that the Tribunal's order was unsustainable. It reasoned that a proprietorship concern has no separate legal identity from the proprietor; they are one and the same. Therefore, the concept of a proprietorship concern borrowing from the proprietor and the company taking over this 'loan' as a liability was fundamentally flawed. The Court found that the Commissioner had correctly applied the law to the facts by treating the goodwill as consideration received by the proprietor, which was indirectly shown as a loan. The Tribunal erred in disturbing this finding by treating the proprietor and the proprietorship concern as separate entities capable of entering into a loan agreement. The Court emphasized that the statute requires consideration to be received only by way of allotment of shares for exemption under Section 47(xiv)(c), and the value of goodwill was indirectly received as consideration. Consequently, the Tribunal's order was set aside, and the Commissioner's order was restored. The issue of whether the deficit in the current account was a genuine liability was implicitly decided against the assessee, as the Court found it to be consideration for the goodwill.

What were the issues?

1. Whether the Tribunal was justified in holding that the Commissioner's invocation of power under Section 263 of the Income Tax Act was wrong, concerning the taxability of goodwill upon the transfer of a proprietorship concern to a company? (Question of law) 2. Whether the Tribunal was justified in holding that the assessee had not violated the conditions under Section 47(xiv) of the Income Tax Act, thereby exempting the transfer of goodwill from capital gains tax? (Question of mixed law and fact) Assessee's contentions: The assessee argued that all conditions under Section 47(xiv) were satisfied. Specifically, for Section 47(xiv)(a), all assets and liabilities were transferred. For Section 47(xiv)(b), the assessee held shares constituting 51% of the paid-up capital and his shareholding never fell below 50%. For Section 47(xiv)(c), no consideration or benefit was received other than allotment of shares, and no interest was received on the balance in the loan account. The assessee also contended that the deficit in the current account was a genuine liability of the proprietorship concern to the proprietor. Revenue's contentions: The revenue contended that the transfer of goodwill attracted capital gains tax. The CIT argued that the assessee received consideration other than shares, specifically an unsecured loan of Rs. 2,73,07,905, which was part of the net assets transferred, and thus Section 47(xiv)(c) was violated. The revenue relied on the principle that when a statute prescribes a particular manner for doing something, it must be done only in that manner.

Which sections of the Income-tax Act were involved?

Section 45,Section 47(xiv),Section 263

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON & THE HONOURABLE MR. JUSTICE A.HARIPRASAD MONDAY, THE 10TH DAY OF APRIL 2017/20TH CHAITHRA, 1939 ITA.No. 1797 of 2009 ( ) ----------------------- AGAINST THE ORDER IN ITA 270/2005 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 12-06-2009 APPELLANT(S)/APPELLANT/RESPONDENT: --------------------------------- THE COMMISSIONER OF INCOME TAX THRISSUR.

BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/APPELLANT: ------------------------ SHRI.K.V.MOHAMMED ZAKIR PROP.KAP INDIA CONSTRUCTIONS, CITY CENTRE, ROUND WEST, THRISSUR.

BY ADV. SRI.P.BENNY THOMAS ADV. SRI.P.GOPINATH ADV. SRI.K.JOHN MATHAI ADV. SRI.E.K.NANDAKUMAR ADV. SRI.RAJA KANNAN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-02-2017, THE COURT ON 10-04-2017 DELIVERED THE FOLLOWING:

[CASE REPORTABLE] P.R. RAMACHANDRA MENON & A. HARIPRASAD, JJ ~~~~~~~~~~~~~~~~~~~~~~ I. T. Appeal No. 1797 of 2009 ~~~~~~~~~~~~~~~~~~~~~ Dated, this the 10th day of April, 2017 JUDGMENT Ramachandra Menon J. Can, a person borrow from himself and whether the 'sole proprietor' and his 'bu

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 45

All 1,329 judgments and leading authorities on Section 45 →

Recent GST High Court judgments

Search GST case law →